NLS Technical Writings

Report on Future Availability of Cassette Tape Components

December 2005

By Alice Baker

Global Trends

Due to the growing trend towards the use of digital media, the demand for audiocassettes
has declined all over the world. Since 2002, forecasts have accurately anticipated
a 20% annual decline in global demand.1 The British Phonographic Industry
reported that 83 million cassettes were sold in the UK in 1989. In 2004 the
number had dropped to 900,000. Additionally, "sales" of pirated
audiocassettes fell 20% in 2002, mirroring drops in the legitimate market.2

While market forecasts agree that the production of audiocassettes is in decline,
debate exists as to when the format will become obsolete. Predictions have
been made that the global cassette tape market will survive competitively for
another 10 years, co-existing with other forms of recordable media.3 Realistically,
it is estimated that cassettes and related equipment will probably be manufactured
for another five to ten years, after which the audiocassette market will mimic
the current vinyl record market.4 (See Table 1).5

The National Library Service distributes recorded books and magazines on audiocassette.
In recognition that digital media will succeed audiocassettes as technology
advances, NLS is moving towards producing digital talking books (DTB) with
a target date of 2008. Given the time span between now and the target date,
as well as understanding that the movement to the DTB will be a transition
rather than an abrupt change, it is important to evaluate the future availability
of audiocassette tape components. This report intends to analyze the issues
facing the production of audiocassettes now and in the future.

CASSETTE SHELLS

The requirements for producing cassette shells for NLS are detailed in Specification
#701. Currently, there is only one qualified manufacturer, Lenco, Inc.- PMC,
but experts in the field indicate that there are suppliers internationally
that may meet NLS specifications.6

The price point for cassette shells has been driven up approximately 12% since
October 2005 by increased petroleum costs.7 It is anticipated that the cost
will continue to increase, most likely another 10%-15% over the next 12 months.8
The availability of cassette shells is not seen as a particular concern, and
the cost increase is viewed as somewhat understandable, given the fact that
it is a petroleum-based product.9

Lenco, based in Waverly, Nebraska, is the only producer of cassette shells
in the United States.10 It produces both five-screw and sonic-sealed cassettes,
as well as cassette and CD/DVD packaging.11 Lenco has a custom molding facility
focusing on molding engineering and commodity thermoplastics.12 Additionally,
Lenco wholly owns and operates the subsidiary CR Manufacturing, which makes
plastic products for the foodservice, restaurant, and bar supply industry.13

Lenco plans to continue to produce cassette shells as long as it is profitable,
but acknowledges the market is shrinking considerably. In 2000, Lenco produced
175 million cassette shells. In 2005, that number was reduced to 40 million.14
Lenco is depending on its diverse manufacturing capabilities to remain competitive
as the market for cassette shells shrinks, and acknowledges that it's parent
company PMC15 makes all decisions relevant to production with a focus on profitability.16

CASSETTE TAPE

Currently, NLS producers purchase "pancake" tape from two primary
manufacturers- Saehan Media and SKM Limited, both based in Korea.17 There are
two other known pancake tape manufacturers located in Europe, ECP and Recordable
Media Group International (RMGI).18 Generally, there is greater concern about
the continued availability of tape rather than shells, although with the small
number of producers currently in existence, a price increase is more worrying.19

Korean Tape Manufacturers

NLS producers buy their tape primarily from two cassette tape manufacturers
in Korea, Saehan Media and SKM. Both are financially unstable, technically
bankrupt, and kept afloat by the Korean government. The support could be
withdrawn at any time, and should that happen both companies would be unable
to produce tape. It is impossible to determine the likelihood of government's
withdrawal of support, but it is a significant factor to consider. Rumors
persist that, due to the financial instability, both Korean tape manufacturers
will soon be sold to the highest bidder, who will then dismantle the factories
and cease production of magnetic tape.

In 2000, Saehan Media experienced significant financial difficulties due in
large part to problems experienced by its parent company, Saehan Industries.
Under Korean law, companies experiencing financial difficulties are able to
seek the cooperation of their creditors to grant a period of time to recover
and repay its debts, while the major creditors gain controlling powers over
all the company's proceedings.

SKM's former management declared bankruptcy in 2000. At the time of the declared
bankruptcy, SKM Ltd. had three operating subsidiaries - the tape manufacturing
business, a company called Dongsun, which manufactured detergents and related
products, and a retail duty-free shop. The combination of the low profit margins
from tape manufacturing, operating losses from Dongsun, and the high cost of
starting the duty-free shops left SKM Ltd. in a cash poor position, and forced
them to seek relief from their creditors.20 SKM has since sold off Dongsun,
and reorganized the company into two distinct divisions — SKM A-V (makers of
audio tape) and SKM Duty-Free Stores.

In May 2001, it was predicted that only one of the two Korean tape-producing
companies would survive due to the decline in the demand for tape. In February
2005 it was reported that Saehan's creditors had lost patience with the "workout" and
offered Saehan for sale. It was anticipated that a bid from an American company,
Lone Star Equity Group, would be accepted, and Saehan's assets would most likely
be auctioned off and the land sold.21 However, as of November 2005, no additional
information about the sale is available.

European Tape Manufacturers

There are two manufacturers of cassette tape in Europe—ECP and RMG International.
While both offer consistently high quality tape and have well-known distributors
in the United States, only ECP is priced competitively.

In the mid-1990s, BASF assisted ECP in the construction of a tape manufacturing
facility in Russia. ECP is a widely diversified company22 and is heavily supported
by the Russian government. While it is impossible to predict exactly how long
ECP will continue to produce tape, it is anticipated that a market will continue
to exist for their product.23 Additionally, Gauss Media Supply (GMS) has agreed
to market ECP's products in the United States, which provides ECP with recognition
in the United States tape market.24 Currently, AMI uses ECP tape for it commercial
productions and is pleased with the quality.25

In February 2005, RMG International (formerly known as Media Products Oosterhout)
announced that it would begin marketing audiotape types formerly manufactured
by EMTEC Magnetics for duplicators and studios. It acquired EMTEC's production
and quality assurance equipment after EMTEC's bankruptcy and subsequent sell-off
in 2004. RMG International has six sales managers working in North America,
with one designated to market pancake tape. Pancake tape produced by RMG International
is currently priced 30% higher than other tape available.

Other Manufacturers and Issues

Quantegy, Inc. ceased operations at its headquarters in Opelika, AL on December
31, 2004 amidst Chapter 11 bankruptcy proceedings, citing "financial
issues that have plagued the industry and Quantegy for some time".26
In April 2005, Discount Tape, Inc. of Peachtree City, GA, purchased Quantegy.
Discount Tape is owned and operated by two previous Ampex-Quantegy employees,
Peter Hutt and Frank Foster. NLS producers attempted to continue using Quantegy
mastering tape with unsatisfactory results, eventually moving to CD intermasters.
While they will continue to produce audiotape, albeit not for NLS producers,
videotape will be the largest revenue generator for Quantegy.27

Video Cassette Tape

Due to the close relationship between audiocassette tape and videocassette
tape, a brief analysis of the videocassette tape market may provide some
insight as to the future of audiocassette tape.

The market for VHS tapes has dropped dramatically in the past year. Many popular
new release movies are no longer being released in VHS format. Circuit City
and Best Buy have stopped carrying VHS tapes entirely, and Wal-Mart has stopped
stocking new released in VHS format.28

As consumers in the United States become more technologically savvy, both
audio and video media is moving towards digital products. However, similar
to audiocassette tape, an international market remains for videocassette tape,
which should ensure its production in the near future.

CASSETTE DUPLICATOR REPLACEMENT PARTS

At least three companies in the United States offer replacement parts, refurbished
parts - including heads - and repair services for cassette duplicators.29
They are located primarily in California, but one advertises an international
presence30, which could indicate longevity due to the remaining cassette
tape market overseas. Each offers an online product search, as well as sales
consultants available by phone.

CONCLUSION

While there appears to be no immediate crisis in the availability of cassette
shells and/or cassette tape, the transition to digital media should be completed
relatively quickly to avoid any unforeseen market changes that could result
in shortages or cost-prohibitive prices. The consensus appears to be that
digital media is indeed the future of audio, however a few years remain before
the future becomes now.

15 PMC was established in 1994 under the direction of CEO Dr. P.M. Chakrabarti, previously the CTO of PPG Industries. PMC owns seven unique organizations focusing on two major platforms - Performance Plastics (of which Lenco is a part), and Performance Chemicals. In November 2005, PMC entered into a joint venture with the rubber chemicals division of ICI India, with PMC owning 51% and ICI India owning 49%.

16 After speaking with one representative from Lenco, the Sales Manager Scott Daniels contacted me pledging Lenco's commitment to producing 5-screw cassette shells for as long as the Library is in the market.

17 Interview with Bob Norton, formerly of Potomac Talking Books and Steve Paris, of American Printing House for the Blind, both conducted on November 17, 2005.

18 AMI has sent in sample tape from ECP to be evaluated by the Quality Assurance Section, but the results have not been made available.